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Understanding Funding Agreements

Sep 27, 2022 | General Estate Planning, Podcasts, T&E Administration, T&E Litigation

“Understanding Funding Agreements” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Toni Ann Kruse, ACTEC Fellow from New York City. Many practitioners are unsure what documents are needed, or helpful when funding following trust during the settling of an estate. ACTEC Fellows Paige Ben-Yaacov from Houston Texas and Stacy Singer from Chicago Illinois, explain why funding agreements are helpful and some of the issues relating to them. I’ll turn it over to you Paige and Stacy.

Releases in Funding Agreements

Stacy Singer: Thanks so much, Toni Ann. So, I think the first question to think about, when we’re thinking about funding agreements, is whether or not an agreement, should include some kind of a release. And, there are really pros and cons to this. The obvious pro is essentially, either speak now or forever hold your peace. So, you know, a personal representative or a trustee obviously wants finality. They want, when they’re settling an estate, to know that what they’ve done has been approved, everyone is okay with it, and no one’s going to come back later and raise a question. So, sending out an agreement that includes a release really gives them that sense of finality.

Now the challenge, of course, is when you do that a beneficiary may say, “Oh, wait a minute, you want me to release you? Let me raise every question I’ve had. Let me raise every issue that I might have left alone, but I’m not going to, now that you’ve asked for this release.” And I think some people think, you know, maybe that’s not worth it. On the other hand, isn’t it better to defend a potential claim while everybody remembers what happened, the fiduciary is in the best position to defend against whatever questions it is, memories are fresh, documents are available?

I think, overall, it’s a better thing to include that request for a release off the bat and, even if it raises an issue, I think you’re still better off ultimately. I think one question that we’ve heard come up quite a bit is, is it different if it’s a corporate fiduciary, as compared to, for example, a family member? And in one sense, of course, a corporate fiduciary has, you know, its requirements and its rules, and so you’re going to see things like this as standard practice from a corporate fiduciary.

But my argument would be everyone should be doing that because an individual fiduciary really should take the same opportunity to get those kinds of releases and have the same sense of finality because the fact that it’s a sibling or a brother or whomever, it is – a cousin, a child – doesn’t mean they’re not going to raise an issue later. So, it really makes sense to make sure that you got these kinds of documents from everyone. Now, what if you can’t? Well, there is always an option to go into court and get court approval. And those tend to vary from state to state. So, you know, Paige, for example, can you share with us what the general processes in Texas?

Independent Administration in Funding Agreements

Paige Ben-Yaacov: Yeah, and I think too, if you’re in a state where there’s some type of filing or accounting that’s made before the distribution occurs, then the fiduciary may not feel as much of a need to ask for a release because there’s already some type of judicial supervision or blessing, then there may not be a concern but a beneficiary is going to come back at a later time and raise the claim. But in Texas, for example, we have what is known as independent administration, which means that very little is filed in court at all.

There are no accountings required, there’s no judicial approval that’s requested before distributions are made, and so, in that instance, where you’re really acting free of court supervision, and nobody has kind of blessed in any way, shape, or form, what the fiduciary has been doing, the fiduciaries in my state are much more likely to ask for a release. But, if they were not able to do so, even in Texas, where we have this independent administration, we can still go to court and ask that the judge to discharge the independent executor from liability for any matters that have been fully and fairly disclosed.

Generally, the independent executor is entitled to pay attorney’s fees and other costs associated with that judicial proceeding from the assets of the estate, but if the costs are not approved by the court as a proper charge against the estate, then the independent executor is personally liable and you don’t have that issue if you just ask for a release and the beneficiaries are willing to grant it.

Indemnification of Trustee in Fiduciary Agreements (Illinois)

Stacy Singer: Yeah. That’s really helpful to know. Illinois, where I practice is a little different because, in our statute, there’s language that specifically states that a trustee can go to court and charge, you know, those expenses to the trust. Now, if we think, you know, beyond a release, the other thing we often times see in these funding agreements for following trusts, is indemnification. So, you know, if something comes up, if there’s a problem, the beneficiaries agree to indemnify the trustee. And you know, what we know is, while a release may prevent a beneficiary from prevailing in a lawsuit, it doesn’t prevent them from bringing a lawsuit.

And so, you know, a fiduciary may incur fees in defending, so why not ask for an indemnification? You know, what’s the harm? The beneficiary may push back and you may have to limit the scope, but that’s not necessarily a bad thing. I mean, why not ask? You might get it. And, even if you have to negotiate it, you’re still in a better place than you were to start with. Now, if an adult child, the beneficiary’s children, and an adult child isn’t signing that indemnification given by the beneficiary can include claims brought by the beneficiary’s child in most jurisdictions. So, you may actually be able to protect yourself from both the beneficiaries and their heirs which can be helpful.

I will say that most corporate fiduciaries are going to be reluctant to sign indemnification and they negotiate those to limit it to, for example, assets on hand or assets distributed. But again, it doesn’t hurt to ask. It can still be really helpful and useful, you know, to get it.

Virtual Representation in Funding Agreements

The last thing I really want to touch on, before turning it over to Paige is, as I mentioned, sometimes you can have the beneficiaries represent their heirs at law. And that concept of virtual representation generally works, particularly for minor beneficiaries, or unknown, or unascertained beneficiaries.

We would generally suggest specifically addressing that in the funding agreement and even calling out the specifics if there’s a state statute and making sure it’s very clear that you’re relying on virtual representation just to ensure that everyone is very clear about it. Paige, do you want to talk a little bit about enforceability?

Paige Ben-Yaacov: Yeah, really what we’re concerned with here is once the executor or the trustee of a revocable trust has turned over those assets and funded the following trust that comes out of the estate or the testator’s revocable trust, what we’re concerned about is that some beneficiary realizes once the money’s already been distributed and it’s in their hands and they realize, “Oh you know what, I really was unhappy with how that executor or trustee did X, Y, or Z. And now I want to bring some claim.” And so, in that situation, you really want those releases and indemnities to be able to withstand a claim that they are unenforceable.

Five Recommendations for Releases in Funding Agreements

And so, we wanted to talk about five things today that you can do to try to help the release that you get for your client – try to help it stand up to court scrutiny and help it to be enforceable.

Recommendation One: Consideration

So those five things. the first one is the consideration. Just, you know, going right back to contract law. If you’re going to get something, you have to give something. What are you giving up in exchange for that release so that your release is enforceable? Typically, one thing that the fiduciary will often give up in exchange for the beneficiary agreeing to give the release, is that the fiduciary will say, “Well, I have a right to go to court and get a judicial discharge, so that I can be comfortable that I’m not liable, but I understand beneficiary that that’s going to be a process that is going to take some time. You’re not going to be able to get the distribution as soon. They’re going to be expenses associated with a court preceding that I am going to pay out of the estate, or trust, and so, if you would be willing to give me a release, I will be willing to forgo my right to go to court and get a judicial blessing.”

And I think it’s important to say, right in the funding agreement, what the fiduciary is giving, what the consideration is. So, if the consideration that the fiduciary is giving is forgoing their right to get a judicial release then the funding agreement will say, “The fiduciary hereby gives up their right to go to court.” Now I will say, in many states, it’s important to not state or imply in any way that the mere making of the distribution from the estate is the consideration. For example in Texas, an independent executor may not require a waiver or release from a distributee as a condition of the delivery of property. So, we never want to say that. But whatever your consideration is, make sure that it is clearly stated in the agreement. So, that’s the first thing you can do to try to help the enforceability of the release and indemnity.

Recommendation Two: Disclosure

The second thing is going to be disclosure. Disclose, disclose, disclose. The release will not be valid for items that are not disclosed. If there are specific things that have been significant during the course of estate administration that has been discussed with the beneficiary- for example, the use of a vacation home, and how it’s been divvied up, and how people have gotten to use it, or maybe selling a significant asset- talk about that in the funding agreement.

And, you know, say that in the agreement, in addition to referencing any specific things that have been disclosed, say in the agreement that the beneficiary – have the beneficiary represent that they have received full and adequate information on which to provide the release of indemnity. I also like to include a provision where the beneficiary represents and agrees that they have received full access to the books and records that they have been provided, with any information that they have requested, and that they waive any further disclosure.

Now, apart from what is specifically documented in the agreement, the fiduciary is going to have been providing the beneficiary with information anyway because we all know that fiduciaries owe a duty of full information to the beneficiaries. So, generally speaking, fiduciaries are going to be disclosing material facts necessary for beneficiaries to protect their interests. In some cases, it may make sense to reference those prior disclosures. But Stacy, I am curious about what you do with your firm in terms of the information that you generally like to provide when you’re acting as a corporate fiduciary? And if that information varies, if a release or indemnity will be requested?

Stacy Singer: Yeah, it’s a great question Paige, and I would say first, no it doesn’t vary. We try to disclose as much as we can both on statements with the descriptions for what has been paid, and where it’s been paid from, but also just in the general information that we’re trying to convey to clients throughout the conversation.

Recommendation Three: Independent Counsel

And maybe I’ll use that to segue a little bit into your third point really briefly, which is we recommend that you at least encourage beneficiaries to get independent counsel. You can’t make them do it, but you really want to encourage them and I would say, encourage it in writing.

Once that beneficiary, you know, has had conversations with counsel for the fiduciary, they may not understand that’s not their attorney. They may not really understand that the attorney for the executor trustee is not representing them. So, it’s really important to make sure that you’re making clear if you represent the fiduciary, that you do not represent the beneficiaries, and encourage them to get their own private or personal representation.

Recommendation Four: Fraud and Duress

Paige Ben-Yaacov: Yeah, I think that can be so helpful, and that actually ties as well to the fourth and fifth points, which I’ll just kind of mention quickly here. The fourth point is just that, of course, there can’t be any fraud or duress. And you want to make sure that: one, there’s nothing that indicates any kind of fraud or duress. That you’ve given the beneficiary plenty of time to consult with counsel and to consider the terms. And I like to say, in the document, have the beneficiary acknowledge and agree that there hasn’t been any fraud or duress. I have been involved in a lawsuit where the beneficiary, after the fact, had buyer’s remorse, tried to claim fraud or duress, and it was helpful that we had representations in the documents stating that there was no fraud or duress.

Recommendation Five: Time  

And then finally, you know, just making sure that the beneficiary and hopefully the beneficiary’s counsel have time to review and negotiate different terms. If there is a case of buyer’s remorse, and a beneficiary comes back later, you know, if you can show the different revisions that were made when the document went back and forth, and the negotiation of the terms, it really helps to bolster the enforceability of that release and indemnity document. So, with that, Stacy which beneficiaries do you like to ask for releases and indemnities from?

Beneficiaries and Releases

Stacy Singer: I think the key is, obviously, the goal was to get from as many as you can, but also to be realistic about what you really can get. So, certainly from any current beneficiaries. It’s very helpful to get from remainder beneficiaries. You know, cast a broad net, see who you can get but the preference, obviously, is more is better. We don’t generally require a notary. I know some people do, I think it could just make it you know, very challenging because it could be hard for people to get notaries. Although of course, now we know with e-notarization in many states it can be a little easier than it used to be. But I think we also have to recognize, that we don’t know how much these releases and indemnifications are worth.

It may be not worth the paper it’s printed on. It could very well be that if the beneficiary has no money, it doesn’t matter that they’ve indemnified you if they’ve spent every penny you gave them. That release may or may not stand up, but it’s still better to have it. It’s better if you’re representing the trustee to make sure they understand this is not a guaranteed, ironclad agreement, but it’s certainly going to help them quite a bit.

And the last point that I want to make before we wrap up is that in any event even if you make the decision not to do a release or an indemnification, you really want to make sure that you have some kind of an agreement to document the division of assets, to make sure it’s clear how you’re dealing with reserves and refunding, and you’re addressing any unpaid debts and expenses. But, as you can see, there are really a lot of issues that can come up when you’re working on funding agreements, and thinking through them, I think can be really, really helpful. With that Toni Ann, I’ll turn it back to you.

Toni Ann Kruse: Thank you so much Stacy and Paige for this very interesting and lively discussion on understanding funding agreements.

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